The best friend any investor has is time. The longer the time horizon, the more time you have to make your money and the markets work for you. Just look at the performance of the S&P 500. Between Dec. 1, 2010, and Dec. 1, 2020, the S&P 500 has increased about 200%, or roughly 11.6% on an annualized basis.
So if you had invested, say, $10,000 in an S&P 500 exchange-traded fund, or ETF, 10 years ago this month, you'd have about $50,000 right now, with $100 contributions each month.
But that's for an ETF that tracks the broad S&P 500. With the luxury of time, you can feel more secure in investing in a more aggressive segment of the market to weather the short-term ups and downs of the market. Say you have a big expense coming down the pike 10 years out, like your son or daughter's college education. If you invested $10,000 in an aggressive growth ETF, you'd probably have enough to pay for a big chunk of that college bill. One great option to achieve that goal is the Vanguard Information Technology ETF (VGT 0.57%).
Vanguard Information Technology ETF has key competitive advantages
The Vanguard Information Technology ETF is one of the oldest, largest, and best performing ETFs on the market. It has been around since 2004 and has amassed $40.6 billion in assets, making it the second largest technology-focused ETF. It tracks a very specific index, the MSCI US IMI Information Technology 25/50 Index. If that's not an index that's familiar to you, you're not alone.
The index tracks the information technology sector, but with a twist: it applies certain investment limits imposed on funds to foster greater diversification. One requirement is that at the end of each quarter, no more than 25% of the value of a company's assets can be invested in a single issuer. Another is the sum of the weights of all issuers representing more than 5% of the fund shouldn't be more than 50% of the fund's total assets. That's where the 25/50 in the index's name comes from.
This allows this ETF to capture a broader swath of the IT stock universe. It currently has almost 350 holdings, including large, mid- and small-cap stocks. That's more diversification than some of its peers, which track more concentrated indexes. This translates to the ETF having lower beta and standard deviation -- two measures of risk -- than most of its competitors. Plus, it has a tiny expense ratio of 0.10%, which is far lower than most of its peers.
Growth of a $10,000 investment
This ETF has an annual return of 12.9% since inception, but over the 10 years since Dec. 1, 2010, it has posted an average annual return of 20.5%. If you invested $10,000 10 years ago at this time, you'd now have about $99,000 -- investing $100 per month. Depending on where your kid goes to college, that could pay for all four years of tuition at some state schools, and at least a year or two at most private institutions.
Of course, past performance is no guarantee of future results, as the disclaimer says, and the last 10 years have been historically strong for the IT sector.
The sector has also been among the strongest through the pandemic as technology has been central to adapting to social distancing protocols. While some companies saw their stocks rise too high, too fast and could see a snapback, in the long term, the sector is going to continue to lead the market over the next decade. While the pandemic will hopefully be a thing of the past in 2021, many of the protocols will remain as part of a new normal, driven by technology. That's not to mention all the new emerging technologies we'll see, such as artificial intelligence (AI), further transform the way we communicate.
So, take advantage of time -- and an investment in a cheap, relatively stable ETF that could produce the type of returns to put your kid through college.